The cyclical nature of the economy has always existed, although we have many people still alive that remember the last great depression over the next 20 years there will be very few that have a good memory of what a real economic disaster is and I fear people will always believe they are living in the worst of times.
I hope you already know some of this but I have to make sure we are on the same page. There are two major areas in economics being macro and micro. Macro is the study of the larger picture on a country or world scale, micro is the study at the transaction level or between people. This paper will focus on the macro economy.
At any given point in time there is a local, regional, national and world economy. They interact but are not always in the same condition as far as growth, retraction, inflation or deflation. If you live in a farming community and have a massive flood your town could be devastated for years. If a major employer closes in a smaller town, it may destroy that town forever. However, that doesn’t mean that even the state you are in is suffering the same. Even if all of these areas are in a recession that does not mean the whole country is in one, and the federal government or Federal Reserve should not act as such. The last “recession” was 8 months long from March to November 2001, however, because of the sluggishness of the economy it did not fully recover until 1st quarter 2003.
This is why no single solution will solve everyone’s problems and why others will use this to their political advantage by saying leaders don’t feel their pain or act as if one thing can fix all. So what is a President or Congressional body to do?
First you create an atmosphere of equal opportunity, I stress here opportunity not equity, no one has figured that one out yet. You do this by creating a consistent educational system for the citizens, a tax code that is both family and business friendly, and an infrastructure of roads, sewage, electricity and now broadband internet services that promote business and freedom of movement. In larger cities freedom of movement include mass transit and in small communities this is a well maintained freeway and street system.
Second, you have laws that protect individual rights, ensure that there is equal opportunity to resources giving no group an advantage over another through political, religious or racial differences. These laws would have to be written by officials elected by the population of the area or country and a court system that is willing to strike down laws that are inconsistent with the constitution but not create or see new rights that are not either laid out in the constitution or by legislation.
Finally, you need a sound monetary system that keeps inflation in check. Inflation rips away at the value of products and services. In a longer period wages can catch up with inflation, however, during the time of turmoil, wealth is destroyed and creates unstable social and thus political atmosphere that can lead to rash decisions or allow groups like the Nazi’s or Communists to come to power.
Specifically:
The Feds will reduce the interest rate on money in order to stimulate borrowing for business and since the “Great Depression” the government will increase its spending to make sure that someone is moving the economy along.
The current economic troubles are similar to the 1970’s in that we have a spike in fuel prices. In the 1970’s it was OPEC flexing its muscles buy reducing its output of oil. However, the killer was Pres. Nixon’s freeze on wages and prices! Yes, there was a federal freeze on pricing and thus the market reacted the way it always does to a limit on prices, there will be a limit on quantity supplied. This created the long gas lines.
Under Pres. Carter it happened again (I remember the lines for this one) and we had the double whammy of inflation and higher then normal unemployment and price controls leading to the recession of 1980. The raising of rates by the Feds broke inflation and has been policy ever since.
However, because we are having another spike in oil prices an increase in Fed rates would have the opposite effect and close down the economy. The rate raise would tighten money and even small increases of a few years ago lead to the “sub-prime” mortgage situation of today. Some Banks may fail or get bought out. S&L’s of the 1980’s were completely wiped out. Credit card companies will have massive right offs, killing their stock and reduce taxable income, thus taxes either paid by them or through dividends paid out.
What to do?
We don’t have to go much farther then the constitution which states that its purpose is to “establish justice, insure domestic tranquility, provide for the common defence, promote the general welfare and secure the blessings of liberty…” Tranquility & Welfare gives the federal government control over commerce, Justice and Defence is our boarders and Welfare also means health (of the economy), and the family unit.
First, much like the cover of, “The Hitchhikers’ guide to the galaxy”, “don’t panic.” Second, don’t have the federal government spend anymore, just change were it is spending. Along with giving money out through extended unemployment benefits or expanded welfare programs, the government should expand college education. By having more people enter the college ranks it will delay their need for work and in a couple of years they will be ready for a better job with a higher education. The flip side is to expand vocational schools.
We still need money available to borrowers by having lower Fed Rates, and I would exempt the first $10,000.00 of interest and dividends earned from the tax return. This would help seniors on fixed incomes and give investments with lower interest rates a leg up on its effective tax rate and keep money in banks to lend out.
Through the tax code I would give bonus deductions on expansion of business equipment and other improvements that include job growth. Increase credits for lower income filers who put money into their retirement plans. Expansion of child tax credits for higher income people, currently limits begin at 100K, I would increase to 200K.
Make transfer of wealth from parents to children much easier by raising limits on yearly amounts and erasing the death tax. Families need to take care of each other. Ease the ability of parents to keep children on their health insurance to 25 even if they are not in college.
Security of the boarder between the U.S. and Mexico to limit drugs and crossing of people shrinking the work force available and have more jobs available for our citizens. A better migrant work program needs to happen. Then during times of strong growth and a need for workers we can increase the number that can come in for short periods of time. This needs a double edge with increased ability to check Id’s and a more standard Id system for none citizens.
Much like your home you want secure doors, the ability to take care of your children, and save without it costing you in the long run.
